Jury finds Apple does not infringe alleged SEPs but rejects claim that plaintiff did not offer license on FRAND terms

Earlier this week, a Texas jury found that Apple’s iPhone and iPad products do not infringe patents owned by Core Wireless that are alleged to be essential to certain cellular standards adopted by the European Telecommunications Standards Institute (“ETSI”). The jury also found that Core Wireless did not breach its contractual obligation to offer a license to the patents on fair, reasonable and non-discriminatory (FRAND) terms.

Core Wireless’ complaint. Core Wireless’ complaint alleged that Apple’s iPad, iPad 2, iPad 3G, iPad with Retina display, iPad mini and iPhone 3G, 3GS, 4, 4S and 5 “were made and sold in accordance with” various 3GPP mobile standards adopted by the ETSI. Core Wireless further alleged that the asserted patents, which it acquired from Nokia, covered those standards and, as such, the accused products infringed. Core Wireless’ complaint prayed for an “accounting of all damages sustained b Plaintiff as the result of Apple’s acts of infringement,” enhanced damages pursuant to 35 U.S.C. § 284, and a “mandatory future royalty payable on each and every product sold by Apple in the future that is found to infringe one or more of the patents-in-suit and on all future products which are not colorably different from products found to infringe.”

Apple’s answer and counterclaim. Apple filed an answer and counterclaim generally denying the allegations in the complaint and asserting affirmative defenses of non-infringement, invalidity and unenforceability. Apple also asserted a counterclaim alleging that Core Wireless breached its contractual obligations to members of ETSI to license the asserted patents on FRAND terms.

For its breach claim, Apple relied upon the following provision in ETSI’s Intellectual Property Right Policy (“IPR”):

When an ESSENTIAL IPR relating to a particular STANDARD or TECHNICAL SPECIFICATION is brought to the attention of ETSI, the Director-General of ETSI shall immediately request the owner to give within three months an irrevocable undertaking in writing that it is prepared to grant irrevocable licenses on fair, reasonable and non-discriminatory [FRAND] terms and conditions under such IPR to at least the following extent:

• MANUFACTURE, including the right to make or have made customized components and sub-systems to the licensee’s own design for use in MANUFACTURE;

• sell, lease, or otherwise dispose of EQUIPMENT so MANUFACTURED;

• repair, use, or operate EQUIPMENT; and

• use METHODS.

The above undertaking may be made subject to the condition that those who seek licenses agree to reciprocate.

Apple alleged that ETSI members as well as members of other standard setting organizations (SSOs) “self-declare patents as ‘essential,’ or necessary to practice the UMTS standard,” but “[o]rganizations such as ETSI do not independently verify whether such patents are actually essential.”

Apple contended that Core Wireless was bound by the FRAND representations made by Nokia, the prior owner of the patents-in-suit:

Core Wireless acquired any rights it has in the Core Wireless Asserted Patents from Nokia Corporation. Nokia is a member of [ETSI], a standard-setting organization that promulgates cellular telecommunications standards. In accordance with ETSI’s Intellectual Property Rights Policy [“IPR”], Nokia made binding and enforceable promises to ETSI and its members—including Apple—to license the Core Wireless Asserted Patents to companies supporting the UMTS standard promulgated by ETSI on ‘fair, reasonable, and non-discriminatory’ or FRAND terms. Those FRAND promises traveled with the Core Wireless Asserted Patents when they were transferred to Core Wireless and continue to bind Core Wireless.

Apple went on to allege that

[d]espite and in breach of the binding contractual commitments obligating Core Wireless to license Apple to the Core Wireless Asserted Patents on FRAND terms, Core Wireless brought this infringement action before even approaching Apple to discuss a license, and since initiating this suit Core Wireless has refused to provide FRAND terms to Apple for the Core Wireless Asserted Patents.

After the suit was filed, Apple alleges that it requested that Core Wireless provide the “FRAND royalty rate for each of” the asserted patents, “with each patent’s rate separately listed” as well as the “methodology by which Core Wireless derived each rate” and “confirmation that Core Wireless offered these same rates to other companies or that companies paid” those same rates, “or if not the same, a description of the rates offered to or paid by other companies and a list of those companies.” According to Apple, Core Wireless never responded.

Core Wireless’ answer and counterclaim. Core Wireless filed an answer to Apple’s counterclaims with counterclaims of its own, alleging that it did, in fact, make several attempts to engage in licensing discussions with Apple, but that Apple refused to respond in breach of Apple’s obligations as a potential licensee of patents alleged to be essential to ETSI cellular standards.

“Apple takes the position that it is a party to license agreement(s), express or implied, to those patents that have been declared essential to an ETSI standard.” Core Wireless alleges further that Apple sent a letter to another declared essential patent owner claiming that “an agreement is formed by virtue of ‘the [ETSI] IPR policies at issue [that] require participants claiming to own essential IPR to commit to license those IPR on FRAND terms to any implementer of the standard.” Apple allegedly accepted these terms when it “began to implement the [ETSI] standard.” “According to Apple, such license agreements are subject only to agreement on the terms of a FRAND royalty as compensation for Apple’s licensed use.”

Core Wireless also pointed to allegations that Apple made in its dispute with Samsung that “‘Apple is licensed to Samsung’s declared-essential patents’” because “‘the [ETSI] IPR policies at issue here require participants claiming to own essential IPR to commit to license those IPR on FRAND terms to any implementer of the standard.’”

Core Wireless further asserted that the patents-in-suit “have likewise been declared essential to the UMTS standard and Core Wireless’ assertion of those patents is subject to the ETSI IPR licensing obligations.” “Thus, by Apple’s own acknowledgment, by electing to practice the UMTS standard, Apple considers itself licensed to the asserted patents owned by Core Wireless.” “By its actions, Apple entered into an agreement with Standard Essential Patent owners to negotiate a FRAND royalty in good faith.” These actions include “Apple’s implementing the GSM/GPRS and/or the UMTS standards in its products and becoming a member of the relevant standards organizations, including ETSI.”

Core Wireless alleges that Apple breached its agreement with Core Wireless by refusing to negotiate a FRAND royalty with Core Wireless, refusing to timely respond to Core Wireless’ FRAND royalty offer, and Apple’s refusal to pay a FRAND royalty.

According to Core Wireless, its outside counsel sent an email to Apple the same day that the lawsuit was filed indicating Core Wireless’ “interest in an early resolution of the underlying dispute without the need for extensive litigation.” “This offer was ignored by Apple.”

“Core Wireless’ outside counsel next reached out a few weeks later . . . to Apple’s local counsel, again indicating Core Wireless’ interest in meeting with Apple, and the response back from Apple was that a discussion would be premature.”

A few weeks later, Core Wireless sent two separate letters to Apple, proposing that the parties negotiate a license on FRAND terms.” Core Wireless alleges that these letters were ignored as well.

Core Wireless also alleged that, later in the year, Apple sent a letter demanding that Core Wireless provide a FRAND royalty rate to Apple.” “After refusing Core Wireless’ offers for over eight months, Apple set a two-week deadline in which it required Core Wireless to respond to Apple’s demand.” This letter was expressly “not pursuant to Rule 408 of the Federal Rules of Evidence,” which generally precludes offers of settlement from coming into evidence to establish liability at trial. Core Wireless alleged that this letter demonstrates that Apple had “no intention of negotiating a FRAND license with Core Wireless, but rather was strictly looking for information to strengthen its positions in FRAND-related litigations.”

After sending the letter, Core Wireless contends that “Apple’s lead counsel in this case indicated to Core Wireless’ outside counsel that Apple ‘did not feel a meeting with Core was ripe yet.'” Core Wireless thereafter responded to Apple’s letter, and again asked Apple to “meet for the purpose of providing a FRAND offer and negotiating a mutually acceptable FRAND license.” “Apple refused to agree to such an offer and meeting by failing to respond to Core Wireless’s” letter.

A few weeks later, Apple sent another letter setting a two-week deadline in which it requested Core Wireless to “provide a FRAND royalty rate to Apple” without “responding, or referring, to Core Wireless'” prior letter.

Core Wireless alleged that, “[f]aced with Apple’s intentional refusal to meet or negotiate, Core Wireless made a specific FRAND royalty rate offer to Apple in writing.” “As part of that offer, Core Wireless offered, in the alternative, to negotiate FRAND rates for the asserted patents.” Apple allegedly did not respond to Core Wireless’ FRAND license offer.

Core Wireless contended that “Apple has gained profits by virtue of its breaches of the license agreement with Core Wireless to pay a FRAND royalty for its use of the Standard Essential Patents and its agreement with . . . Core Wireless[] to negotiate a FRAND royalty in good faith.” Core Wireless alleged that it suffered harm as a result of Apple’s alleged breach, including “being denied of the adequate and fair reward, i.e., a FRAND royalty for the use of its Standard Essential Patents, and being forced to resolve this matter through unnecessary litigation in which Core Wireless has to pay unnecessary litigation expense and attorneys’ fees.”

Core Wireless also alleged that Apple breached its contract with ETSI by failing to respond to Core Wireless’ overtures to negotiate a FRAND rate and forcing Core Wireless to litigate the issue. Clause 3.2 of the ETSI IPR Policy provides, in relevant part, as follows:

IPR holders whether members of ETSI and their AFFILIATES or third parties, should be adequately and fairly rewarded for the use of their IPRs in the implementation of STANDARDS and TECHNICAL SPECIFICATIONS

“By its membership in ETSI and its implementation of the ETSI standards, Apple is required to comply with this ETSI IPR Policy, including the requirement to adequately and fairly reward the Standard Essential Patent owner for the use of its patents in the implementation of GSM/GPRS and/or UMTS standards.”

Core Wireless alleged that Apple breached its contract with ETSI by refusing to negotiate and ultimately pay a FRAND royalty rate with Core Wireless.

In its prayer for relief, Core Wireless requested, inter alia, a judgment declaring that Apple is not a willing licensee to Core Wireless’ asserted Standard Essential Patents.” Core Wireless also requested a “judgment ordering Apple to specifically perform its obligation to pay a FRAND royalty to Core Wireless according to the agreement between Apple and Core Wireless and/or according to Apple’s duty to ETSI, including a determination of the FRAND royalty rate owed by Apple to Core Wireless.”

Trial. At trial, Core Wireless whittled its infringement case down to claims in five of its alleged standard essential patents. In the jury instructions on damages, the court noted that, to the extent that the jury found that Apple infringed, Core Wireless was seeking damages in the amount of a reasonable royalty. “A reasonable royalty must reflect that Core Wireless declared the asserted patents to be essential to cellular standards and committed to the [ETSI] to license the patents on ‘fair, reasonable, and non-discriminatory’ or FRAND terms.” The court expressly noted that it was not instructing the jury “that the asserted patents are actually essential to any standard.” That was for the jury to decide.

On several other FRAND-related issues, the parties disputed the language of the jury instructions. It is unclear from the docket which instruction the court ultimately gave, but the parties’ positions are summarized here.

Apple proposed that the court give an instruction expressly requiring the jury to “consider any evidence of patent hold-up and royalty stacking” in “deciding what amount is a FRAND royalty.” Core Wireless objected to this instruction because “Apple has not provided sufficient evidence on these concepts, and Apple made no more than a general argument that hold-up and staking were possibilities.” According to Core Wireless, “[i]n order to be instructed on these concepts, Apple was required to present actual evidence at trial; it did not.”

Core Wireless contended that, to determine FRAND, the jury should consider and apply all fifteen factors for determining a reasonable royalty set out in Georgia-Pacific Corp. v. U.S. Plywood Corp. Apple, on the other hand, contended that the “Georgia-Pacific approach is not the only way to determine a reasonable royalty.” Quoting the Federal Circuit’s decision in Ericsson v. D-Link, Apple argued that “‘many of the Georgia-Pacific factors simply are not relevant” and “‘many are even contrary to [F]RAND principles.'”

With respect to apportionment, Core Wireless asserted that the jury must “apportion the damages between the portion of the accused products that are the patented features or components and the unpatented features and components of the accused products.” “In determining the amount of a reasonable royalty [the jury] may consider not only the benefit to the patentee in licensing the technology, but also the value of the benefit conferred to the infringer by use of the patented technology.” When applying the 15 Georgia-Pacific factors, the jury “should only consider as the royalty base the portion of the value that is attributable to the patented features or components as compared to the portion of the value associated with other features or components, such as unpatented elements, features, components, or improvements developed by Apple.” If the jury found that “the patents are standard essential then damages should be apportioned from the value of the standard as a whole and should be based on the value of the invention, not any value added by the standardization of that invention.”

Apple contended, with respect to apportionment, that the Federal Circuit’s decision in Ericsson required the jury to first apportion the patented feature from all of the unpatented features reflected in the standard. Second, any royalty that is calculated “‘must be premised on the value of the patented feature, not any value added by the standard’s adoption of the patented technology.'” “‘These steps are necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology.'” “‘In other words, the patent holder should only be compensated for the approximate incremental benefit derived from his invention.'” Apple argued that “‘[t]his is particularly true for [standard essential patents].” “‘When a technology is incorporated into a standard, it is typically chosen from among different options.'” “‘Once incorporated and widely adopted, that technology is not always used because it is the best or the only option; it is used because its use is necessary to comply with the standard.'” “‘In other words, widespread adoption of a standard essential technology is not entirely indicative of the added usefulness of an innovation over the prior art.'” According to Apple, to ensure that a FRAND royalty rate reflects the incremental value of the patented technology, the jury was required to consider the following two factors in setting a FRAND royalty rate: (1) any royalty for the patented technology must be apportioned from the value of the standard as a whole; and (2) the FRAND royalty rate must be based on the value of the invention, not any value added by the standardization of that invention.

With respect to the royalty base, Apple requested that the court give an instruction requiring the jury to determine the royalty for the smallest saleable patentable unit. Again relying on Ericsson, Apple contended that, “‘as with all patents, the royalty rate for [standard essential patents] must be apportioned to the value of the patented invention.'” “‘In order to properly apportion the incremental value attributable to the patented technology, [the jury] must select the royalty base that reflects the value added by the patented feature, where the differentiation is possible.'” “In the case of multi-component products, like smartphones and tablet computers, where demand for the entire product is not attributable to the patented feature,'” the jury should not “base the royalty on the price or revenues of the entire product, but instead ‘must [use] a more realistic starting point for the royalty calculation . . . often, the smallest saleable unit and, at times, even less.'”

Core Wireless objected to this instruction as “inappropriate in this case.” According to Core Wireless, “[n]either party’s damages’ expert calculated damages based on smallest salable unit, and appropriate apportionment instructions are included elsewhere, and this is only one of many ways to ensure apportionment.”

Apple also requested that the court instruct the jury that it could calculate damages based on a one-time lump-sum royalty: “[o]ne way to calculate a royalty is to determine a one-time lump sum payment that the infringer would have paid at the time of the hypothetical negotiation for a license covering all sales of the licensed product both past and future.” “This differs from payment of an ongoing royalty where a royalty rate is applied against future sales as they occur.” “When a one-time lump sum is paid, the infringer pays a single price for a license covering both past and estimated future infringing sales.” “It is up to [the jury], based on the evidence, to decide what type of royalty (if any) is appropriate in this case.” Core Wireless objected “to the inclusion of a Lump Sum Royalty instruction as neither party’s damages expert offered any opinion on a lump sum and it is thus not relevant to the case.”

With respect to Core Wireless’ breach of contract claim, Apple disputed whether it had any contractual obligation to Core Wireless or ETSI and, in the alternative, that it did not breach any such obligation. With respect to Apple’s breach of contract claim, Core Wireless argued that Apple waived any such claim by failing to negotiate a FRAND rate and, further, that Core Wireless’s “alleged failure to comply with a FRAND obligation is excused if [the jury] find[s] Apple previously failed to comply with a material obligation of the same agreement.” Core Wireless also contended that Apple’s breach claim was barred by Apple’s anticipatory repudiation in the form of refusing to negotiate.

The jury subsequently determined that the accused Apple iPhone and iPad products did not infringe Core Wireless’ five asserted patents. As a result, the jury was not required to determine infringement damages.

The jury also determined that Core Wireless had not breached its obligation to license the patents-in-suit on FRAND terms.

Note that the verdict form provided that, if the jury did determine that Core Wireless had breached its FRAND obligations, Apple could only recover nominal damages between $.01 and $1.00. This is different from Microsoft’s recovery of damages from Motorola as a result of Motorola’s alleged breach of its obligations to license its alleged SEPs to Microsoft on RAND terms. In the Microsoft case, a jury awarded Microsoft approximately $11 million for certain costs incurred to relocate a distribution center as a result of the alleged breach as well as approximately $3 million in attorneys fees and litigation costs incurred to defend against Motorola’s infringement claims. Microsoft was able to collect the latter category of damages because Motorola sought injunctive relief for Microsoft’s alleged infringement. Core Wireless’ complaint, however, did not seek injunctive relief from Apple, which may be the reason that Apple did not seek its attorneys’ fees and litigation costs as damages for Core Wireless’ alleged breach.

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David W. Long founded Essential Patent LLC (http://essentialpatent.net) to focus on patent law and related hi-tech intellectual property issues, including standard essential patents, licensing negotiations, mediation and other legal services. David has over twenty-five years of telecommunications experience, including over twenty years litigating complex patent cases in federal district and appellate courts. Read More

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The Essential Patent LLC intellectual property law firm welcomes you to the Essential Patent Blog! This blog was started in response to increased interest and litigation surrounding standard-essential patents (SEPs). Historically, most SEP issues were relegated to theoretical discussions in academic literature or conference presentations. But that’s changing.